The future of our economy depends on how well the media cover the tax debate
COMMENTARY | September 27, 2011
Martin Lobel writes that special interests are defining the terms of a debate in which the economy is at stake. And he offers an extraordinary resource to reporters who want to understand taxation issues better.
By Martin Lobel
Now that both political parties are making taxes and tax “reform” the centerpiece of the presidential campaign, it is more essential than ever for the press to really examine the “reforms” that are being proposed and what is missing. If the media cannot educate the public about what is at stake when the campaigns are focused on tax reform, real reform will be put off and our economy will be in even worse shape than now.
The Republicans, at least until the voters focus on the issue, are against raising any taxes even if it means closing tax loopholes or subsidies they admit are unjustified. But most of them are all for cutting expenditures. They act as though, economically, tax expenditures and appropriated expenditures are different animals. They aren’t – except that most appropriated expenditures benefit lower- and middle-income Americans while tax expenditures benefit the wealthiest. Hacker and Pierson in Winner-Take-All Politics discussed how changes in the tax code played a role in the massive shift of income from the middle class to the very wealthy over the last 30 years. Basic questions such as whether income from investments should be taxed at a lower rate than income from labor have been ignored as the lobbyists for the wealthy and multinational corporations have carved out more and more tax subsidies (aka tax expenditures).
The tax code has been transformed from a means of raising revenue to a way to fund social welfare programs for the rich and poor, which the IRS has a great deal of difficulty administering. Everyone knows that the tax code is much too complicated, needs to be simplified and made more efficient. But the interested parties have their own ideas on how to accomplish those goals. The multinational corporations think the tax code should be simplified and focused on making them more competitive internationally, i.e. increase their subsidies. Tea party leaders think the tax rates should be cut to starve government so that we can eliminate disaster relief, education funding, medical research and all the other activities of government they think are unnecessary or improper.
Let’s take a look at just three tax proposals with multi-billion dollar consequences which have not received much attention in the media to see whether they qualify as reforms.
Multinational corporations have been pushing the U.S. to adopt what is called territorial taxation, under which only those activities that are conducted within the United States or allocated by the multinationals to the U.S. would be subject to U.S. taxes. They claim that allowing them to shift their profits to low tax areas enhances their competitive ability. That is true, of course, but it comes at a huge cost to the American taxpayers and significantly impairs the competitiveness of domestic companies, which have to pay taxes on their profits.
In Tax Notes, a publication I am affiliated with, a recent series by Marty Sullivan points out that multinational companies legally shift billions of dollars of profits to low tax areas, and for every job created abroad, one job is cut in the U.S. Going to a territorial system would not just allow this kind of tax avoidance or evasion, it would encourage it and increase the incentive to export jobs. Shouldn’t we be going in the other direction? Shouldn't we stop this artificial shifting of profits by requiring the multinational companies to use unitary or combined worldwide reporting in allocating profits where they should be taxed? For example, if a multinational company had 10 percent of its personnel, 10 percent of its sales and 10 percent of its property in the U.S., it would owe U.S. taxes on 10 percent of its worldwide profits. That would essentially stop the multinationals’ shell game of shifting profits to the lowest tax jurisdiction. Such a system has been upheld by the U.S. Supreme Court as an accurate way of determining taxable profits and is being considered by the EU to limit tax evasion. But where is its discussion in the media?
Value Added Tax (VAT)
Everyone knows that we need to increase revenue to cut the deficit. However, the Republicans are on record as opposing any increase in the income tax and everyone is aware of how difficult it is to reform our current tax system because those who are beneficiaries of tax subsidies (aka expenditures) will fight hard to retain them. One solution, according to many tax “experts,” is the adoption of a VAT on top of our loophole-ridden income tax system. The assumption is that the Democrats will love it because it can raise large sums of money without the public being aware of it; the Republicans will love it because it is regressive; and no one will have to offend those who benefit from the existing tax code and are such a large source of campaign contributions.
The problem with a VAT is that it is a hidden sales tax on consumption. Since middle- and lower-income groups spend proportionately more of their income than do the very wealthy, they would bear a disproportionate share of the burden without seeing it on their tax returns. That would exacerbate the dramatic shift of income from the middle class to the very wealthy over the last 30 years. And, because such a consumption tax would cut the middle class’s disposable income, it would lower the demand for goods and slow the job growth we need to get the economy moving again.
Although proponents claim a VAT would be simple to administer, they have clearly not read the plethora of articles pointing out the difficulties of administering a VAT, particularly when intangibles, such as royalties, which are most subject to abusive shifting of income, are involved. Outside of the pages of Tax Analysts publicatlons, where is the media discussion?
Financial Transaction Tax (FTT)
Most European countries are going on record in October in support of a financial transaction tax to raise revenue and correct flaws in the market that have seriously injured economies, including the American economy. But there is hardly any discussion of such a tax in the American press -- although again, Tax Notes, with articles by Lee Sheppard, is an exception. An FTT would raise revenue from the financial sector to partially compensate the government for bailing it out, but, more importantly it would kill high frequency trading and reduce the use of derivatives and repo financing by raising their costs. High-frequency trading is essentially computer-driven front running and should be killed. Derivatives and repo financing, despite their contribution to the economic meltdown, are still essentially unregulated and need to be curbed. Otherwise these hidden liabilities will come back to bite us and now that everyone on Wall Street is too big to fail, guess who is going to have to pick up the tab?
These are just three topics that need to be closely examined and explained to the public. It’s a major challenge because the issues are complicated and every special interest worthy of that name has battalions of lawyers and flacks who earn big bucks to push their clients’ point of view. In my view, the future of our economy depends on how well the media can make the public understand what is at stake. No news beat is more important, or, with a few notable exceptions, as poorly covered. Most reporters and editors obviously could use some help. As it happens, the publications I am affiliated with have been assisting journalists for many years, so at least some help is at hand.
Reporters and editors can get free assistance from Tax Analysts, either by finding articles by topic on its websites (www.tax.org and www.tax.com), or phoning to request copies of articles needed or to ask to speak to a person who covers a specific issue. Tax Analysts is a 501(C)(3) dedicated to providing accurate, timely information about tax and economic issues. I should know. I’ve been chairman of the board of Tax Analysts since 1971.
09/27/2011, 03:06 PM
Good article, with the exception of the VAT piece. Precisely in which country that operates a VAT, does the author find that it is a "hidden" tax?
Both the Canadian HST/GST and Singapore GST systems cater for the "regressive" nature of the tax on middle and low income households. In Canada, the HST/GST credit, offers relief from the tax burden in 4 annual rebate payments to every adult Canadian citizen falling into the middle / low income band. Similarly, Singapore offers a package of off-sets.
While the VAT has often been discussed in the US press of late, sadly lacking is accuracy in this reporting. Further, by continuing to compare a possible future US VAT to the advanced EU VAT system, or worse to finger the VAT for the current crisis that exist in Greece, Spain, Ireland etc, is misleading. A fair assessment of the pros / cons of a possible VAT should instead look north to Canada to a GST/HST system that has since 1991 evolved and provided huge benefits to both the federal treasury (debt reduction anybody?) as well as taxpayers. In fact Canada may be the outlier in the VAT world, as the VAT rate has actaully gone down over 20 years. From 7% when it was instituted in 1991 to 5% now at the federal level. The federal debt has been tackled and interest payments on the debt brought under control. At the same time, both personal and corporate income tax rates have also decreaed, but none moreso that the CIT rate which is set to be lowered to 15% in the coming years. A 15% CIT rate will be among the lowest in the OECD.
Objective assessments of a US VAT should have a look up north at what those Canucks have done and see if something similarly efficient might not make sense south of the 49th.